Orbán's Hungary defies the critics to draw in FDI

Hungary’s politics – perceived by some as insular – might have drawn flak, but they have certainly not deterred investors. Officials say the country’s stability is successfully attracting FDI as well as substantial reinvestment, while exports recently hit a high, as Courtney Fingar reports.

The Hungarian government, led by populist prime minister Viktor Orbán, has faced a storm of criticism from EU leaders and others for its handling of the migrant crisis and alleged authoritarian bent. The perception is of an insular and unwelcoming country.

But the numbers tell a different story about Hungary’s openness – at least in economic terms. Both exports and FDI are thriving: Hungarian exports reached a record-breaking €90.5bn in 2015, a 7% rise on the previous year. The foreign trade surplus also hit a historic high, at €8.6bn, reversing a recent contraction.

The automotive industry accounts for 20% of Hungary’s exports and the number of people employed in the sector reached 150,000 in 2015, according to government figures. Exports from electronics makers and the pharmaceutical industry have also contributed to the expansion of Hungary’s foreign trade, the government says.

Numbers rebound

Meanwhile, after a dip in 2013, the number of greenfield investment projects announced in Hungary by foreign companies rebounded in 2014 and 2015, according to crossborder investment monitor fDi Markets, and 2016’s figures have already comfortably surpassed those of 2015 with end-of-year projects still trickling in.

Hungarian officials brush off the external political criticism and decry what they see as high-handedness and hypocrisy by western European capitals over the issue of refugees. They also stress that investors tend to ignore the noise and focus on economic and market fundamentals, about which Hungary is increasingly confident.

“Business people are usually smarter than politicians,” says deputy foreign minister László Szabó. “Our inward FDI is growing at an incredible speed and our exports are hitting historic highs. We crossed the €90bn threshold in exports – this is only 30% to 40% lower than Austria or Sweden, whose GDP is three or four times larger than ours. Even at the height of the migration crisis, companies were flooding in. It’s a sign of trust.”

Daniel Palotai, chief economist at Hungary’s central bank, adds: “In Hungary, reinvested earnings from FDI have remained relatively high: foreign companies have reinvested more than 50% of their profits in recent years, much higher than the regional average, and perhaps a reflection that these companies are happy to invest in Hungary again and have confidence in the economy.”

Flexible labour law

After some rocky post-crisis years, the Hungarian economy stabilised in 2012 and has been growing since then. “We were able to reduce the budget deficit from about 85% to 70% of GDP, which is quite nice progress, but it’s not only about that. We created a new labour law that is probably the most flexible in Europe, meaning that it’s much easier to adjust the size of the workforce to the needs of the company,” says Mr Szabó.

Róbert Ésik, president of the Hungarian Investment Promotion Agency (HIPA), says the agency has already negotiated more than €3.2bn in inward investment in 2016, which is more than double the previous year. These investments should bring more than 17,000 jobs, an almost 35% year-on-year increase. HIPA has 141 projects in the pipeline, representing more than €4.4bn and potential headcount of more than 29,000.

“What investors are looking for is a stable and growing economy – and I think that stability and growth is visible in Hungary, in both economic and political terms,” says Mr Ésik. “Hungarian GDP growth reached 4% in 2014, then 3.1% in 2015 and in the second quarter of this year economic growth was 2.6% compared with the corresponding period of the previous year – we’d like to keep this at roughly 3% growth in the years to come. In terms of fiscal stability, since 2012 we’ve had a budget deficit that was below the 3% threshold and public debt fell below 75% during the past year. All of the microeconomic and financial indicators show stability.”

Automotives growth

These factors, coupled with Hungary’s central European location, advanced infrastructure and cost effectiveness, have enabled the country to compete strongly in several FDI sectors, especially automotives. Already in 2016, more than 20 automotive original equipment manufacturers and component suppliers have announced or launched investments in Hungary, totalling an estimated $2.4bn, according to fDi Markets.

Analysis from location assessment tool fDi Benchmark shows total average operating costs for an automotive components manufacturing facility in Hungary are lower than in the Czech Republic and Slovakia, two of its major competitors (although Poland remains cheaper, as do Bulgaria and Romania). In mid-2016, Mercedes-Benz announced it would invest $1.1bn in a new manufacturing plant in the city of Kecskemét, creating 2500 jobs. The facility, which will build front- and rear-wheel drive cars, is scheduled for completion in 2020 and will be able to make 150,000 vehicles a year.

Manufacturing across all sectors has seen more than $3bn in announced greenfield investments in Hungary in 2016; in turn, this is creating large demand for industrial and warehousing space and sparking a flurry of logistics activity. The logistics, distribution and warehousing sector had attracted $460m of investment by early December 2016, according to fDi Markets data.

Logistics opportunities

For providers of logistics and warehousing real estate, Hungary offers both “location and yields”, says Philippe Beurtheret, director of property developer Immochan Hungary, which has 19 hypermarkets across Hungary as well as housing development and warehousing sites.

“The logistics companies already present here are at capacity and need new sites on which to expand, plus others are coming in. There is also a lot of scope for industrial real estate – every week there is a factory opening up or expanding,” says Mr Beurtheret.

These industrial sectors should continue to attract interest, but beyond that, the next wave of FDI into Hungary is expected to be in R&D and other highly advanced functions for which Hungary believes its educational system and skills levels make it a viable option. “We are shifting towards higher value-added functions. When we talk about the future, our strategy is to move from ‘made in Hungary’ towards ‘invented in Hungary’,” says Mr Ésik.

Either way, FDI will remain at the heart of Hungary’s internationalist economic agenda. “FDI has a great importance to our economy because we are one of the most open economies in the world and Europe. The only way to ensure a sustainable GDP growth for us is to be successful in two things: one is to continue to attract additional investment and the other is to support our SMEs so that they can become export capable,” says MrÉsik. “We are very dependent on FDI and it’s in our utmost interest to remain competitive and to continue to have this ability to attract investment.”

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